With a background in economics and public policy, I've covered domestic and international energy issues since 1998. I'm the editor-in-chief for Public Utilities Fortnightly, which is a paid subscription-based magazine that was established in 1929. My column, which also appears in the CSMonitor, has twice been named Best Online Column by two different media organizations. Twitter: @Ken_Silverstein. Email: ken@silversteineditorial.com

Snowy Roads Aren't Putting a Damper on High Gas Prices

With all the snow on the roads, one would think that would be put a damper on gasoline prices. Not so. They have increased about 50 cents a gallon this year to about an average of $3.80 a gallon. And the kids haven’t even gotten out of classes for the spring break. What’s going on?

peak oil: supply vs. demand (Photo credit: D.L.)

Two schools: One is saying that the spike is the result of excessive speculation while the other holds the more traditional position that the increase is a function of supply and demand. In any event, price jumps are occurring at a time when the economy seems poised to expand — a proposition that would take money out of consumers’ pockets and put more of it into the hands of oil producers.

Simply, financial speculators are hoping that the price of barrel of oil will change. They are betting against another entity such as a bank or a hedge fund, which is taking the opposite position. By flooding the market with billions of dollars and then making public prognostications that oil prices will rise, such gamblers are accused of creating a self-fulfilling prophesy.

In fact, President Obama has argued for limiting the number of positions that any one trader could hold. He has said that the “irresponsible few” are “illegally manipulating” or “rigging the energy markets for their own gain.”

To be clear, the speculators don’t actually take physical possession of the oil in which they are buying or selling at an agreed upon price. Once a contract has expired, each side must live up to the agreement that was reached.

The concern, generally, is that billions of speculative dollars are chasing a fixed amount of oil, working to increase commodity prices. Interestingly, ExxonMobil’s Chief Executive Rex Tillerson has testified on Capitol Hill that such risk taking has caused the price of a barrel of oil to go up by as much as 40 percent. The Commodities Futures Trading Commission (CFTC) has said that financial firms trading either for themselves or for their clients could hold as much as 81 percent of all contracts on the NYMEX.

The cumulative result: “(G)lobal demand explained about 40 percent of the oil price increase within the past decade,” adds Luciana Juvenal and Ivan Petrella in a Federal Reserve Bank of St. Louis report. “Speculation was the second-largest contributor to oil prices and accounted for about 15 percent of the rise. The effect that speculation had on oil prices over this period coincides closely with the dramatic rise in commodity index trading—resulting in concerns voiced by policymakers.”

Others, however, caution against over-regulation. Many financial and trading organizations say that unimpeded participation in the energy sector creates more liquidity and openness. Investment banks and hedge funds are the catalysts. And while they try to profit from price volatility, they are responsible for product innovation and for the formation of a robust market. That, in turn, creates efficiencies and prices are eventually a truer reflection of supply and demand.

“We do find that buying and selling in the oil futures markets exerts an influence on oil prices,” says a statement by Goldman Sachs. “Buying and selling is how information about current and expected future oil supply and demand conditions is transmitted through the market, allowing the oil market to adjust the oil price in order to balance supply and demand. This is how a market works.”

The investment banking firm goes on to say that speculators have no more of an impact on gas prices increases that an improving world economic outlook. But at a time when things are sunnier in the United States, key Democratic lawmakers are working with the CFTC to set trading limitations.

Tighter restrictions are a view to which CFTC Chair Gary Gensler subscribes and one that is also supported by large industrial energy consumers. But the commission, which was given that authority as part of the 2010 Dodd-Frank banking law, has tried to clamp down. Its efforts, however, are being legally challenged by the financial institutions that have the backing of many Republican lawmakers.

Who’s “right?” When “new” money floods commodities funds, it can create upward price momentum that will exacerbate any supply and demand distortions, adds Valerie Wood, president of the Madison, Wis.-based consultancy, Energy Solutions.

There are not any quick fixes to rising oil prices — not the proposed regulatory remedies nor more drilling access. In fact, President Obama says that during his tenure the country has quadrupled the number of operating rigs to help quench the nation’s thirst for oil.

Beyond the current “all-of-the-above” energy strategy, the administration says that the most effective way that government can assist oil consumers is to take steps to prevent market manipulation. That view is to the dismay of others, who say that prices are pushed down by driving less and drilling more. As the spring and summer driving seasons gear up, the debate is bound to get hotter.

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The only reason that the price of oil CAN be manipulated is that by the naure of its use—-it is a de facto cartel monopoly in the transportation fuel market.

Consumers have no choice. Take it at our price or leave it.

Market manipulation is not so much a function of financial markets as it is a function of supply markets. Control the supply, and you control the market.

Petroleum is the ideal tool in a controled market. Not only is the supply of raw material(crude oil), unevenly and inequitably distributed—-even if consumers COULD scoop up all the oil they need out of their backyard, it would do them no good at all, it still needs to be refined—-another choke point to control the market and prices.

Biofuels can be produced from raw materials anywhere, and for the most part, production of biofuels are low tech simple operations adaptable even to small community standards. The antithesis of giant corporate market control of the petroleum industry production and distribution network.

This is why petroleum industry is so deathly opposed to allowing biofuels to get a market toe hold. It would mean the death kneal of their strangle hold on a captive market where they dictate supply and price.

Want adequate supply and low prices for petroleum products? Mandate that all cars sold in the US need to be multifuel, and biofuel capable. If consumers have a real choice available, it would do more to eliminate market monoply, supply and price fixing than anything else that could be done. And it would be done FAR more effectively than laws, regulations, subsidies, commodity supports, or politicians can—-by the consumers who buy the products. They are the ones the ones that oil companies will have to get to approve their price hikes—–one tankful at a time.

Oil companies would have to go back to the “old fashioned” way of earning consumer loyalty and trust, and enormous profits————–they’d have to earn it.